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Dan Pellissier, President, California Pension Reform

January 21, 2011

[Publisher's Note: As part of an ongoing effort to bring original, thoughtful commentary to you here at the FlashReport, I am pleased to present this column from Dan Pellissier of California Pension Reform - Flash]

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By posing a single question in his inaugural address, Governor Brown charted a path to more than $6 billion in annual savings for state and local governments – what are fair public employee retirement benefits for workers and taxpayers?  Sadly, during a recent meeting with Republican legislators, he said the answer to that question will have to wait.

Major kudos to Costa Mesa Republican Assemblyman Allan Mansoor for taking the opportunity during a budget briefing to ask Governor Brown to reconcile his lofty message with his union friendly budget proposal.

More than a decade after the state legislature and most local government agencies granted retroactively enriched retirement benefits assuming the dot-com boom investment returns would cover their huge costs, nearly $700 billion in unfunded liabilities and severe budget strains have finally prompted this important call for public introspection.

Of course fairness is in the eyes of the beholder.  Public employees who have been receiving retirement benefits far, far more valuable than their private sector counterparts will claim their continuation as almost a divine right, one protected by state and federal Constitutions.  It is certainly in their financial interest to do so.

Using CalPERS own statistics, the average state employee who retired last fiscal year received a benefits package worth more than $1.4 million.  This bonanza is in stark contrast to the $60,000 the Employee Benefits Research Institute says the average American has available for his or her own retirement.  Is it fair to have taxpayers pay for retirement benefits 20 times more valuable than they receive themselves?

To build these very rich benefits over time, state and local government agencies pay between 10-50% of employee salary into pension funds each year.  The Bureau of Labor Statistics says the average private sector employer contribution to retirement benefits is 3.6%.  Is it fair to have taxpayers pay as much as 10 times more for retirement benefits than they receive at their own job?

Although most pension plans require employees to contribute a portion of the cost of their benefits, many local governments pay that cost too, along with the entire cost of retiree health care benefits.  Is it fair to require employees to make half the investment in their retirement?

When growing revenue was expanding state and local government budgets, public employee unions and politicians quietly boosted benefits and absorbed increasing required contributions.  Yet the harsh reality of revenue reductions and budget deficits is forcing state and local governments to take a second look at the generous benefit levels.

Indeed, former CalPERS Chief Actuary Ron Seeling warns that California faced decades of “unsustainable” pension costs ranging from 25-50% of employee salaries each year.  “We’ve got to find some other solutions,” he told a gathering of local government officials.

Clearly any fair set of retirement benefits must be sustainable within government budgets, without crowding out the vital services taxpayers expect to receive for their tax dollars.  The unprecedented cuts to education, health care, safety net and public safety programs Governor Brown just announced are clear evidence that pension expert Ron Seeling’s timely warning is accurate and retirement benefits much change.

Reducing the very generous benefits public employees feel entitled to receive has always been a difficult political decision.  Public employee unions are major contributors to candidates at all levels of government, so politicians are very slow to anger their past and future benefactors.

The situation is made more difficult when state constitutional law is interpreted to protect forever the benefits being earned by current public employees.  Unlike the private sector, state court decisions say public employees are entitled to earn for their entire career the pension benefit levels they are offered on their first day of work.   This interpretation makes it impossible to achieve significant short-term budget relief as pension cost savings can only be achieve by hiring new employees.

This fiscal constraint must be broken to protect California government agencies while their pension funds are severely underfunded.  No rational interpretation of the state and federal constitutions includes an autopilot to fiscal ruin.  As a 1993 federal appellate court decision says, judges must "attempt to reconcile the strictures of the Contract Clause with the 'essential attributes of sovereign power' necessarily reserved by the States to safeguard the welfare of their citizens."  A state constitutional amendment drafted to meet this interpretation of the federal Contracts Clause would allow all state and local pension funds to stop adding to their liabilities while they recover.

Of course fair, uniform, lower cost benefits, capped at private sector benchmarks, would be provided to all state and local government employees.  Once a retirement system returns to full funding, current employees could resume earning at their higher benefit levels, while new employees keep their new deal.

As legislators struggle to close the state budget gap, they must seriously consider amending the constitution and placing limits on state and local government retirement plans, changes that meet the Governor’s fairness test.  There are huge savings available if the politicians can muster the courage to take on the public employee unions and demand them.  If they don’t, it is very likely taxpayers will revolt again, imposing by initiative the changes politicians are too timid to make themselves.

Dan Pellissier is the President of California Pension Reform, a citizens group building support for a pension reform initiative in 2012.  You can contact Pellissier, via the FR, here.

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